The government has set in motion a process of policy and tax-rate fine-tuning and exporters are one of the first set of beneficiaries.

Currently, a tax deduction under Sec 10 A is allowed on export profits of units in free trade zones, STP, electronic hardware technology park engaged in the manufacture or production of articles, things or computer software. No deduction is allowed to any undertaking beyond the assessment year 2009-10. However, for a unit in an SEZ, IT deduction is available even beyond the assessment year 2009-10. These units enjoy a deduction equivalent to 100 per cent of the export profits for the first five years, 50 per cent of profits for the next two years. A further deduction equivalent to 50 per cent of the export profits is available for three consecutive years, with re-investment conditions

The deduction is set to be extended by another 10 years. For the first five years, the units will continue to be eligible for a 100 per cent deduction on export profits. A deduction equivalent to 50 per cent of the export profits will be available for the next five years (instead of two now). And a further deduction up to 50 per cent of the export profits is set to be granted for 10 consecutive years (instead of three now), subject to the reinvestment conditions.

The conditions are that the amounts credited to the reserve account are to be utilised for acquiring new plant and machinery, which will have to be used before the expiry of a period of three years. Till the acquisition of plant and machinery, the reserves can be utilised only for the purposes of the business of the undertaking. The IT Act makes it clear that the reserves cannot be used for distribution of dividends or profits, or for remittances outside India as profits, or creation of any assets outside India.

In the official amendments to the Finance Act 2003, the government extended 100 per cent tax exemption to off shore banking units set up in SEZs for three years and a 50 per cent exemption for the next two years. Corporate tax benefits are reckoned to be better in the Indian SEZs compared to China. China’s SEZs offer a two-year tax holiday for manufacturers followed by a three-year discount of 50 per cent on corporate tax.

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Indians who have overseas direct investments may be permitted to hedge the exchange risk by entering into forward/option contracts with authorized dealers, according to a recently issued RBI circular. However this cover will be subject to verification of such exposure and provided that the contracts are completed by delivery or rolled over on the due date.

The government has already allowed Indian residents to invest in shares of companies listed abroad. This is limited to shares of those foreign entities, having subsidiaries in India. Returning non-resident Indians (NRI’s) are also allowed to maintain their global investments, provided they pay tax on their world income. Earlier their status of “resident, but not ordinary resident” was for a period of seven years. During this period, they were not supposed to disclose their investments or pay tax on it. This time period was been reduced to two years on their return, after this years Union Budget was introduced.

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